A Debt Subordination Agreement is a legal document that establishes the priority of claims against a debtor’s assets in the event of liquidation or bankruptcy. In a situation where a borrower has multiple creditors, this agreement specifies that one creditor’s claim is subordinate, or lower in priority, to another creditor’s claim.
This arrangement is often used in business financing to manage the risks associated with lending. For instance, if a company has both senior and subordinated debt, the senior creditors will be paid first from any available assets in the event of financial trouble, while subordinated creditors will only receive payment after senior creditors have been satisfied.
The Debt Subordination Agreement typically outlines the terms of the subordination, including the specific debts affected, the rights of each creditor, and any conditions under which the agreement may be modified or terminated. For example, if a business takes on additional financing, the new creditors may require existing subordinated creditors to maintain their subordinate status to secure their own claims.
Overall, these agreements are crucial in determining the order of payment and protecting the interests of senior creditors while allowing companies to secure additional financing under defined terms.
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